Islamic finance encompasses a broad range of financial products that are structured in compliance with Islamic law (Shariah). There are, however, diverging views amongst scholars and Ulama on the type of transactions that are permissible as Shariah compliant. Islamic finance in Nigeria is provided by a few niche lenders.
Principles of Islamic finance
The general principles of Islamic finance include the prohibition of usury or interest (riba), excessive uncertainty (gharar) and gambling (maysir), as well as risk and profit sharing between involved partners. Additionally, assets and investments can only come from, and be made in, Shariah compliant activities, and transactions must be backed by tangible, identifiable underlying assets. All financial institutions offering Islamic financial products and services must also be supervised by a Shariah Supervisory Board.
While Islamic finance accounts, as of 2010, for only about 1 percent of global financial assets, it represents one of the fastest growing segments of the international financial system, with an annual growth rate exceeding 20 percent over the past decade. Islamic assets stood at USD 1 trillion in 2010 and are expected to reach USD1.6 trillion in 2012. These assets span a broad range of financial activities, products and services, ranging from personal and corporate banking to insurance, capital market securities, investment funds and microfinance.
Islamic finance in Nigeria
Home to a significant portion of the Muslim population in West Africa, Nigeria features a potentially strong demand for Islamic financial services and products, presenting significant opportunities to deepen and broaden financial intermediation. While still comparatively underdeveloped, Islamic finance is expanding in northern part of the country.
Assets in established Islamic markets such as Egypt and Sudan reached USD 6.3billion and USD7.2billion respectively by end-2008, while Nigeria has stated intentions to develop our market into Islamic financial hubs for the continent.
Islamic banking, a banking system that is based on the principles of Shariah and obeying two basic principles which are the sharing of profit and loss and the prohibition of the collection and payment of interest; largely dominate Islamic financial systems Holding almost 75 percent of global Islamic assets worldwide in 2008. Fully-fledged Islamic banks and commercial banks with Shariah compliant windows represent the most important source of Islamic investments and form the majority of Islamic financial service providers across Africa.
Takaful and retakaful represent forms of Islamic insurance and re-insurance based on principles of mutual assistance, burden-sharing and joint guarantees. Global takaful contributions reached an estimated USD 7 billion in 2009. While the number of African takaful companies is still limited, gross takaful contributions across the continent have exhibited an 18 percent compound annual growth rate (CAGR) between 2005 and 2008, and increased by 26 percent in 2009 to reach an estimated USD 377 million.
Islamic Capital Markets
Islamic Capital Markets have significantly expanded following the development of Islamic finance instruments and Islamic accounting standards and regulatory bodies. While the principles of gharar and maysir largely prohibit trades in most types of derivatives, Islamic Capital markets are becoming increasingly sophisticated platforms for companies to raise Shariah compliant funds.
The global market for Sukuk, Islamic financial certificates similar to bonds and asset-backed certificates, has expanded rapidly in response to increasing demand from IFIs and individual investors for Shariah compliant equity. Malaysia is the biggest sukuk market in the world with 39% of sukuk outstanding or equivalent to USD80.2 billion, with 825 issues (2009), The London Stock Exchange’s sukuk market is the largest in Europe. In accordance with the prohibition of ribah, sukuk are structured to not generate interest, but rather place the assets that back the sukuk into a special purpose vehicle (SPV) that provide returns based on concrete transactions. By end-2009 cumulative total global sukuk issues topped USD24.6 billion. Sukuk markets in Africa are still very limited with sukuk issuance in very few countries, such as Sudan and The Gambia, while others such as Egypt have announced plans to further develop domestic sukuk markets in the future.
Islamic Investment banks and Islamic Investment Funds are becoming increasingly active investors on global markets. Although very few Islamic funds operate in Africa, by end-2009 between 700 and 800 Islamic funds worldwide managed just over USD 52 billion in assets. Often adopting structures similar to that of mutual funds, equity funds, leasing funds and commodity funds, Islamic funds aim to generate profits from large scale investment pooling, underwriting and market-making activities.
Islamic Microfinance offers the potential to significantly expand access to finance, particularly to poor and unbanked households which do not use conventional microfinance services for religious reasons. While limited publicly available data makes assessing the state of Islamic microfinance in Africa difficult, a 2007 CGAP survey revealed that at least 5 Islamic microfinance institutions (Islamic MFIs) operated in Africa in 2007 (1 in Mali, 1 in Somalia and 3 in Sudan) disbursing over USD 2 million to more than 12,400 clients. According to the same survey, although Islamic MFIs had a global outreach of only about 380,000 clients, representing about 0.5 percent of total microfinance outreach at the time, there was a large unmet demand for Islamic microfinance products indicating a strong growth potential for the sector.